Overview

Rock of Ages is an integrated quarrier and manufacturer of granite and products manufactured from granite. During the first nine months of 2008, we had two business segments: quarry and manufacturing. The quarry division sells granite blocks to the manufacturing division and to outside manufacturers, as well as to customers outside North America. The manufacturing division's principal products are granite memorials and mausoleums used primarily in cemeteries. It also manufactures specialized granite products for industrial applications.

In the third quarter of 2008 revenues in our quarry division increased 15% from the same period last year. The increase was primarily due to higher sales of granite from our Bethel quarry. In addition, the gross margin for the third quarter of 2008 was four percentage points higher than last year due to production efficiencies from the new diamond wire saw technology and other production changes we implemented in our quarries earlier this year. SG&A expenses decreased 29% due to staffing reductions offset somewhat by higher export costs due to the strength of the Euro and bad debt expense. The quarry operating income was 47% higher than the same period last year.

Revenue in our manufacturing division increased 36% in the third quarter of 2008 compared to the same period last year primarily as a result of sales to our formerly owned retail outlets which had been eliminated as inter-company sales in the prior years and an increase in sales of industrial products. The gross profit dollars increased $557,000 from the prior year but gross margins decreased by two percentage points due mainly to a decrease in higher margin mausoleum sales and higher sales of the lower margin monumental sales. SG&A expenses decreased $75,000 or 7% from the prior year. The manufacturing segment's operating income was 73% higher than in the prior year's third quarter due to the higher sales volume.

On January 17, 2008, we sold our retail division for approximately $8 million. In connection with the sale, we entered into an Authorized Retailer, Supply and License Agreement whereby the purchaser of the retail division, PKDM Holdings, Inc. ("PKDM") was appointed an authorized Rock of AgesŪ retailer in the existing retail territories formerly serviced by our retail stores. PKDM also agreed to purchase $3.5 million of product under the supply agreement during each year of the five-year term. This purchase commitment can be reduced over the term of the agreement based on the number of retail locations controlled by PKDM. The Company is currently in negotiations with PKDM on the reduction in the annual purchase commitment as a result of sales of locations by PKDM since January 2008. In addition, the Company retained $2,125,000 of inventory located at various retail locations for which PKDM is responsible to purchase at the Company's current book value, as it is sold, plus any inventory remaining after the tenth anniversary of the transaction.

Critical Accounting Policies

Management's Discussion and Analysis of Financial Condition and Results of Operations is based upon our Consolidated Financial Statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America (U.S. GAAP). The preparation of these financial statements requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue and expenses, and related disclosure of contingent assets and liabilities. Management bases its estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances. Actual results may differ from these estimates.

An accounting policy is deemed to be critical if it requires an accounting estimate to be made based on assumptions about matters that are highly uncertain at the time the estimate is made, and if different estimates that reasonably could have been used, or changes in the accounting estimates that are reasonably likely to occur periodically, could materially impact the financial statements.

Our critical accounting policies are as follows: revenue recognition, impairment of long-lived assets and long-term investments, valuation of deferred tax assets, and accounting for pensions and other post-employment benefits. There have been no material changes in the Company's critical accounting policies or changes in the methodology applied by management for critical accounting policies from what was previously disclosed in our most recent Form 10-K.

Results of Operations
The following table sets forth certain statement of operations data as a
percentage of total net revenues with the exception of quarry and manufacturing
gross profit and SG&A, which are shown as a percentage of their respective
segment's net revenues.




                                       Three Months Ended       Nine Months Ended
                                      September   September   September   September
                                      27, 2008    29, 2007    27, 2008    29, 2007
Net Revenues:
         Quarry                           51.4%       55.7%       47.7%       50.6%
         Manufacturing                    48.6%       44.3%       52.3%       49.4%

          Total net revenues             100.0%      100.0%      100.0%      100.0%

Gross Profit:
         Quarry                           40.0%       36.4%       21.7%       18.5%
         Manufacturing                    31.3%       33.2%       26.7%       32.4%

           Total gross profit             35.8%       35.0%       24.4%       25.3%

Operating expenses:
         Selling, general and
administrative expenses:
         Quarry                            6.1%        9.9%        9.3%       11.7%
         Manufacturing                    12.7%       18.6%       14.9%       16.3%
         Corporate overhead                5.0%        9.2%        7.6%        9.9%
         Insurance recovery -                 -           -           -      (0.6%)
quarry asset
         Foreign exchange loss                -        0.3%           -        0.0%

           Total operating expenses       14.3%       23.3%       19.9%       23.4%

Income from continuing operations
before interest, other income and
income taxes                              21.5%       11.7%        4.5%        1.9%

Other income, net                         (0.3% )    (0.4%)      (0.5%)      (0.4%)
Interest expense                           2.0%        3.8%        2.7%        3.9%

Income (loss) from continuing
operations before income taxes            19.8%        8.3%        2.3%      (1.6%)

Income tax expense                         1.4%        2.0%        0.7%        1.2%

Income (loss) from continuing             18.4%        6.3%        1.6%      (2.8%)
operations

Discontinued operations                       -        5.2%      (0.4%)           -

Net income (loss)                         18.4%       11.5%        1.2%      (2.8%)

Three Months Ended September 27, 2008 Compared to Three Months Ended September 29, 2007

On a consolidated basis for the three-month period ended September 27, 2008, compared to the three-month period ended September 29, 2007, revenue increased 24%, gross profit increased 27% and total SG&A expenses decreased 16%. The Company reported income from continuing operations of $3.1 million in the third quarter of 2008, compared to income from continuing operations of $845,000 for the third quarter of 2007.

Quarry Segment Analysis

Revenue in our quarry division for the three-month period ended September 27, 2008 was up 15% from the three-month period ended September 29, 2007 primarily as a result of increased shipments from our Bethel White quarry. The sales of Bethel got off to a slow start in the first half of the year but increased in the third quarter and we believe demand will remain strong for the remainder of the year. Demand for our Barre Gray granite, which accounts for approximately one third of the quarry division's net sales, remained comparable to the third quarter of the prior year.

Gross profit dollars from our quarry division increased by $705,000 or 26% and gross profit as a percentage of revenue increased to 40% for the three-month period ended September 27, 2008 from 36% for the three-month period ended September 29, 2007. The increase in our gross profit and the improvement in our gross margin was primarily the result of our investment in new diamond wire saw technology and other production changes implemented in our quarries earlier this year.

SG&A expenses decreased 29% due to staffing reductions which were partially offset by higher export costs due to the strength of the Euro.

Manufacturing Segment Analysis

Revenue in our manufacturing division for the three-month period ended September 27, 2008 increased $2.1 million or 36% compared to the three-month period ended September 29, 2007. The increase in revenue was due to approximately $300,000 in higher sales of industrial products and $1.8 million in higher sales to our authorized dealers, of which $700,000 was to our formerly owned retail locations that had been eliminated as inter-company sales in prior years.

Gross profit dollars from the manufacturing division increased $557,000 or 28% even though gross profit as a percentage of manufacturing revenue decreased by two percentage points for the three-month period ended September 27, 2008 compared to the three-month period ended September 29, 2007. The decrease in the gross profit margin is primarily the result of lower sales of higher margin mausoleums and higher sales of lower margin monuments during the quarter.

SG&A costs for the three-month period ended September 27, 2008 for the manufacturing division decreased $75,000 or 7% compared to the three-month period ended September 29, 2007, primarily due to decreased commissions on mausoleum sales.

Consolidated Items

Corporate overhead, consisting of operating costs not directly related to an operating segment, decreased 33%, or $407,000, for the three-month period ended September 27, 2008 compared to the three-month period ended September 29, 2007. These decreases are the result of the consolidation of our corporate offices and staff reductions following the sale of the retail division.

Other income, which includes rental income from non-operating properties, in the third quarter of 2008 was comparable to the prior period.

Net interest expense, including $154,000 allocated to discontinued operations in 2007, decreased $323,000, or 49%, for the three-month period ended September 27, 2008 compared to the three-month period ended September 29, 2007 as a result of debt repayments made in January 2008 from the proceeds of the sale of the retail division as well as decreased interest rates.

Income tax expense was $223,000 for the three-month period ended September 27, 2008, compared to $264,000 for the same three-month period in 2007. The tax expense reported in both periods was entirely due to our Canadian subsidiary and is less than 2007 due to decreased third quarter earnings at our Canadian subsidiary. During the third quarter of both years we continued to fully reserve against all our U.S. deferred tax assets.

We had no income from discontinued operations in the third quarter of 2008. For the third quarter of 2007 we had income from discontinued operations of $696,000 which is made up of the retail division's operating income of $850,000 less $154,000 of interest allocated to those discontinued operations.

Nine Months Ended September 27, 2008 Compared to Nine Months Ended September 29, 2007

On a consolidated basis for the nine-month period ended September 27, 2008, compared to the nine-month period ended September 29, 2007, revenue increased $1.6 million or 4%, gross profit decreased slightly, $12,000 or 1% and total SG&A expenses decreased $470,000 or 9%. The Company reported income from continuing operations of $623,000 in the first nine months of 2008 compared to a loss from continuing operations of $1.1 million in the first nine months of 2007.

Revenue in our quarry division for the nine-month period ended September 27, 2008 was down $343,000 or 2% from the nine-month period ended September 29, 2007 primarily because of lower shipments from our Bethel White quarry during the first half of the year which were not fully offset by the higher Bethel shipments in the third quarter of this year compared to the same period last year. The Bethel White granite is a building stone typically used in the construction industry, which impacts the timing of orders. We expect sales of Bethel White will be strong in the fourth quarter as well.

Despite slightly lower sales overall in the quarry division for the nine months ended September 27, 2008, due to the improvements in the production process implemented earlier this year, gross profit increased $538,000 or 15% and gross profit as a percentage of revenue increased three percentage points to 22% for the nine-month period ended September 27, 2008 compared to 19% for the nine-month period ended September 29, 2007.

SG&A expenses in the quarry division decreased $487,000 or 22% due to staffing reductions which were partially offset by higher export costs due to the strength of the Euro and increased bad debt expense.

Revenue in our manufacturing division for the nine-month period ended September 27, 2008 was up $1.9 million or 10%, from the nine-month period ended September 29, 2007. This is due to sales to our formerly owned retail locations that are now recognized as revenue whereas in 2007 the sales were shown as part of the retail segment and increased sales of industrial products somewhat offset by decreased sales of mausoleums.

Gross profit dollars from the manufacturing division decreased $550,000 or 9% and gross profit as a percentage of manufacturing revenue decreased by five percentage points for the nine-month period ended September 27, 2008 compared to the nine-month period ended September 29, 2007. The decrease in gross profit is primarily the result of lower sales of higher margin mausoleums and higher sales of lower margin monuments during the 2008 period.

SG&A costs for the nine-month period ended September 27, 2008 for the manufacturing division increased slightly, $17,000 compared to the nine-month period ended September 29, 2007, primarily due to increased sales salaries.

Consolidated Items

Corporate overhead, consisting of operating costs not directly related to an operating segment, decreased 20%, or $752,000, for the nine-month period ended September 27, 2008 compared to the nine-month period ended September 29, 2007 due to the consolidation of the corporate offices and staff reductions resulting from the sale of our retail division.

Other income, which includes rental income from non-operating properties, was slightly higher this year than the first nine months of last year.

Interest expense has been allocated to discontinued operations in the amounts of $23,000 in the first nine months of 2008 and $466,000 in the first nine months of 2007. Net interest expense, including amounts allocated to discontinued operations, decreased $885,000, or 45%, for the nine-month period ended September 27, 2008 compared to the nine-month period ended September 29, 2007 reflecting debt repayments in January 2008 from the proceeds of the sale of the retail division, decreased interest rates and the positive cash flow in the second half of 2007 that was used to pay down debt.

Income tax expense was $280,000 for the nine-month period ended September 27, 2008, compared to $457,000 for the same nine-month period in 2007. The tax expense reported in both periods was entirely due to our Canadian subsidiary and is lower due to decreased earnings at our Canadian subsidiary. During the first 9 months of both years we continued to fully reserve against all our U.S. deferred tax assets.

We had a loss of $142,000 from discontinued operations in the first half of 2008 which is made up of $119,000 of operating losses and $23,000 of allocated interest. This compares to income from discontinued operations of $4,000 in the first nine months of 2007 which is made up of the retail division's income of $470,000 and $466,000 of allocated interest.

Liquidity and Capital Resources

Historically, we have met our short-term liquidity requirements primarily from cash generated by operating activities and periodic borrowings under the credit facilities described below. Our $50 million credit facility with our Lenders was renewed on October 24, 2007 for a term of five years.

We have historically contributed between $800,000 and $1.0 million per year to the defined benefit pension plan. The Company is not required to make any contribution in 2008, however we did contribute $750,000 to the defined benefit plan in the third quarter for the 2007 plan year. The value of the securities in the Company's employee pension plan has been adversely impacted by market volatility and price declines over the past three months. The declines could have a substantial impact on the funded status of the plan resulting in increased future cash contributions and increased pension expense in 2009 and beyond. See note 7 of the Notes to Unaudited Consolidated Financial Statements.

Our primary need for capital will be to maintain and improve our quarry and manufacturing facilities. We have spent approximately $3.2 million for capital expenditures in the first nine months of 2008. We believe any remaining capital expenditures in the fourth quarter of 2008 will be minimal.

In January 2008, we received $7.7 million in net proceeds from the sale of the retail division. We applied $4.5 million of these proceeds to the long-term debt and $3.2 million to the revolving credit facility.

Cash Flows

At September 27, 2008, we had cash and cash equivalents of $1.1 million and working capital of $22.2 million, compared to $5.3 million of cash and cash equivalents and working capital of $19.1 million at September 29, 2007.

Cash Flows from Operations. Net cash provided by operating activities was $434,000 in the nine-month period ended September 27, 2008 compared to $1.8 million in the same nine-month period of 2007. The decrease in cash flow from operations is due primarily to the decrease in the amount of customer deposits as a result of the sale of the retail division.

Cash Flows from Investing Activities. Cash flows provided by investing activities were $4.5 million in the nine-month period ended September 27, 2008. Purchases of property, plant and equipment totaling $3.2 million plus $179,000 to purchase the remaining portion of a customer list from a former competitor were offset by proceeds from the sale of the retail division totaling $7.7 million. Cash used in investing activities in the same period in 2007 was $688,000. Capital spending was $1.1 million partially offset by the proceeds from the sale of property, plant and equipment. Cash used in investing activities comes from either borrowings under our credit facilities or from operations.

Cash Flows from Financing Activities. Net cash used in financing activities in the nine-month period ended September 27, 2008 was $5.7 million which consisted of repayments on the long-term debt of $4.7 million, net repayments on the revolving line of credit of $992,000 and increased debt issuance costs of $24,000. This compares to $854,000 used in financing activities in the corresponding period of 2007, which consisted of net repayments on the long-term debt of $1.5 million partially offset by net borrowings on the revolving line of credit of $602,000.

Cash Flows from Discontinued Operations. The cash flows from discontinued operations in 2007 are included in the cash flow from continuing operations in the Consolidated Statements of Cash Flows. If discontinued operations were stated separately the net cash flow from discontinued operations was an increase of $21,000 made up of $2.9 million provided by operations, $78,000 provided by investing activities and $2.9 million used in financing activities. The absence of cash flows due to discontinued operations is not expected to significantly affect the Company's future liquidity or capital resources.

CIT Credit Facility

We have a credit facility with the CIT Group/Business Credit and Chittenden Trust Company (the "Lenders") that is scheduled to expire in October 2012 and is secured by substantially all assets of the Company located in the United States. The facility consists of an acquisition term loan line of credit of up to $30.0 million and a revolving credit facility of up to $20.0 million based on eligible accounts receivable, inventory and certain fixed assets. Amounts outstanding were $9,507,000 and $14,356,000 as of September 27, 2008 and $13,819,000 and $19,186,000 as of September 29, 2007 on the revolving credit facility and the term loan line of credit, respectively. Availability under the revolving credit facility was $10,493,000 as of September 27, 2008. The credit facility financing agreement places restrictions on our ability to, among other things, sell assets, participate in mergers, incur debt, pay dividends, make capital expenditures, repurchase stock and make investments or guarantees, without pre-approval by the Lenders. The financing agreement also contains certain covenants for a Minimum Fixed Charge Coverage Ratio (the "Ratio") and a limit on the Total Liabilities to Net Worth Ratio of the Company.

Minimum Fixed Charge Coverage Ratio. The credit facility requires the ratio of the sum of earnings before interest, taxes, depreciation and amortization (EBITDA), to the sum of income taxes paid, capital expenditures, interest and scheduled debt repayments be at least 1.00 for the trailing twelve-month period at the end of each quarter through December 31, 2008 and 1.10 beginning with the first quarter of 2009. The Company was in compliance with the Ratio covenant at September 27, 2008.

Total Liabilities to Net Worth Ratio. The credit facility also requires that the ratio of our total liabilities to net worth (the "Leverage Ratio") not exceed 2. The Leverage Ratio excludes from the calculation the change in tangible net worth directly resulting from the Company's compliance with SFAS No. 158 of up to $6 million. In relevant part, SFAS No. 158 required us to place on our books certain unrecognized and unfunded retirement liabilities as of December 31, 2006. We were in compliance with the Leverage Ratio at September 27, 2008.

Interest Rates. We have a multi-tiered interest rate structure on our outstanding debt with the Lenders. We can elect the interest rate structure under the credit facility based on the prime rate or LIBOR for both the revolving credit facility and the term loan. The incremental rate above or below prime and above LIBOR is based on our Funded Debt to Net Worth Ratio. Based on this ratio, our rates at September 27, 2008 were 25 basis points higher than the lowest incremental rates currently available to us.

The rates in effect as of September 27, 2008 were as follows:

                               Amount         Formula      Effective Rate
Revolving Credit Facility $ 4.5 million        Prime           5.00%
Revolving Credit Facility   5.0 million    LIBOR + 2.00%       4.80%
Term Loan                   14.4 million   LIBOR +2.25%        5.05%

Canadian Credit Facility

The Company's Canadian subsidiary has a line of credit agreement with the Royal Bank of Canada that is renewable annually. Under the terms of this agreement, a maximum of $4.0 million CDN may be advanced based on eligible accounts receivable, eligible inventory and tangible fixed assets and is renewed in May each year. The line of credit bears interest at the U.S. prime rate. There was -0- and $20,000 CDN outstanding as of September 27, 2008 and December 31, 2007, respectively.

Off-Balance Sheet Arrangements

With the exception of our operating leases, we do not have any off-balance sheet arrangements, and we do not have, nor do we engage in, transactions with any special purpose entities.

Seasonality

Historically, the Company's operations have experienced certain seasonal patterns. Generally, our net sales have been highest in the second or third quarter and lowest in the first quarter of each year due primarily to weather. Cemeteries in northern areas generally do not accept granite memorials during winter months when the ground is frozen because they cannot be properly set under those conditions. In addition, we either close or reduce the operations of our Vermont and Canadian quarries during these months because of increased operating costs attributable to adverse weather conditions. As a result, we have historically incurred a significant net loss during the first three months of each calendar year.